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Reforming under pressure Europe’s agenda for robust growth and higher productivity
March 10, 2026
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER:
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Good afternoon,
Thank you, President Letta, for the kind invitation to speak at IE University—a university that embodies exactly what Europe needs more of: entrepreneurship, openness, and the ambition to scale ideas globally.
It is a pleasure to discuss Europe’s economic future with you—and especially alongside Enrico, whose work on the Single Market, including “Much More than a Market” and the “One Europe, One Market” initiative endorsed by European leaders recently, has helped re-center this debate at a critical moment.
Let me begin with a simple question. If Europe were a company, how would investors assess it? They would see low unemployment. They would see inflation back at target. They would see strong institutions and social stability. But they might also ask: where is the growth engine? And this question goes to the heart of Europe’s economic challenge.
Let me be clear: Europe is not sick.
Growth, while modest, has proven resilient despite repeated global shocks.
Take Spain. Spain has been one of Europe’s growth leaders in recent years, with strong job creation and a steady decline in unemployment. This progress demonstrates that meaningful dynamism is possible—even in a difficult global environment.
Europe’s economic and social model remains the envy of the world. European citizens benefit from strong safety nets, universal access to quality healthcare, vibrant cities, and a deep commitment to sustainability.
These achievements are not accidental. They are the product of decades of thoughtful policymaking and institutional strength.
But stability is not the same as dynamism. And here lies the uncomfortable truth: Europe’s relative economic weight in the global economy has been shrinking.
In 2010, the European Union’s economy was broadly comparable in size to that of the United States and significantly larger than China’s (Figure 1). Since then, the gap—especially in productivity—has widened [1].
European firms have been less innovative than global competitors. And this is not only about technology giants. Across sectors, productivity growth has lagged (Figure 2).
In short, Europe’s potential is gradually diminishing—just as pressures are intensifying.
There are three major pressures.
First, fiscal pressures.
Public spending demands are rising—on pensions, healthcare, and defense. By 2040, these pressures could amount to almost 5 percent of GDP. Sustaining Europe’s social model will require a stronger economic base.
Second, geopolitical fragmentation.
The global trading system is becoming less predictable. Nearly 20 percent of European imports are strategically important inputs (Figure 3 and 4). This leaves key sectors vulnerable to supply disruptions and subject Europe to the weaponization of trade.
Third, energy and strategic dependencies.
Since Russia’s invasion of Ukraine, energy costs have risen and price differences in electricity across Europe have widened. At the same time, global export restrictions on critical raw materials have increased sharply.
Europe’s economic model was designed for integration and openness. It is now operating in a world of fragmentation and uncertainty.
The question, therefore, is not whether Europe has strengths. The question is whether those strengths are sufficient for the world we are entering.
So what is holding Europe back?
Europe does not have a talent deficit. It does not have a savings deficit. It does not lack ideas.
It has a scale deficit.
While Europe produces exceptional entrepreneurs and world-class research, too few firms grow large enough to compete globally from within Europe.
In the United States, firms scale up across a single market of 340 million people under one regulatory framework. In Europe, firms operate across 27 national regimes.
A European startup can succeed in Madrid. But scaling to Milan, Munich, or Warsaw often means navigating different licensing systems, insolvency rules, and administrative requirements.
In some cases, it is easier to expand to the United States than across Europe.
The data confirms this pattern. U.S. public-traded firms are larger and younger than their European counterparts (Figure 5). Mature U.S. firms employ eight times as many workers as young firms; in Europe, the ratio is closer to two. And this is scale at work.
Scale matters because scale supports investment in research and development.
Scale supports resilience.
And scale supports higher wages.
Without scale, innovation remains local. With scale, it becomes global.
So, what should Europe do?
This brings me to my central message:
The most powerful tool Europe has to raise productivity and strengthen economic resilience is already in its hands—the Single Market.
But it is unfinished.
Because Europe does not yet operate as one fully integrated market, firms remain smaller and less productive than they could be. Financial markets remain fragmented. Energy systems remain partially disconnected. Labor mobility remains constrained.
Completing the Single Market is not a technical adjustment. It is a growth strategy.
A fully integrated market would allow firms to operate at continental scale.
It would deepen banking and capital markets, enabling better risk sharing.
It would create more stable electricity prices through interconnected grids.
And it would allow workers to move more easily to where their skills are most productive.
In short: integration is Europe’s comparative advantage.
The challenge is to finish what was started.
So, how much is left to do?
Even today, the remaining direct and indirect costs of cross-border trade within the EU are equivalent to a tariff of around 44 percentage points for goods and 110 percentage points for services—two to three times higher than those among U.S. states [3].
Europe’s internal market is still far from frictionless.
What drives these costs?
First, high administrative burdens: multiple licensing requirements, duplicative approvals, complex labeling rules.
Second, fragmented capital markets: costly cross-border investment and limited venture capital for scaling firms.
Third, low labor mobility. Imagine you receive two job offers after graduation—one in Madrid, one in Munich. In theory, the Single Market guarantees free movement. In practice, you may face delays in recognition of qualifications, uncertainty about pension portability, housing shortages, and administrative complexity. These frictions feel personal. But they are also macroeconomic inefficiencies. By some estimates, moving across borders in Europe is around eight times more costly than comparable moves within the United States.
Finally, energy fragmentation. Insufficient interconnectors and regulatory differences prevent Europe from operating as a true energy union. Energy price dispersion has become a structural competitiveness issue.
All of this reduces scale. All of this reduces productivity.
The encouraging news is that the gains from reform are substantial. Structural reforms that reduce cross-border business costs have the highest impact.
Our research shows that a comprehensive package of EU-level and national reforms—reducing intra-EU barriers toward U.S. levels and creating a truly integrated Single Market—could raise productivity by around 20 percent (Figure 6). And, that is transformational.
Moreover, higher productivity would crowd in up to €800 billion in additional private investment over ten years—roughly 18½ percentage points above baseline. Over time, GDP per capita could increase by around 35 percent.
These are not marginal improvements. They would reshape Europe’s economic trajectory.
And the gains are not only about growth.
A deeper Single Market strengthens economic resilience by enhancing risk-sharing, improving capital allocation, and stabilizing energy supply.
Integration is both a growth strategy and a security strategy.
Our simulations show that when both EU-level and national reforms are implemented—even partially—all countries gain [2].
Existing production hubs become more productive. High-potential regions with strong fundamentals benefit as constraints ease (Figure 7).
Some regions may face adjustment pressures. But restoring incomes in those regions would require only a small fraction of total gains.
The overall pie becomes significantly larger.
What needs to be done? We need reforms to be implemented at both EU and national levels.
First, let me talk about EU reforms, and I would group them under four priorities:
One rulebook.
One capital market.
One labor market.
One energy market.
One Rulebook for Firms. Today, the Single Market operates under 27 national legal regimes. Setting up and scaling a business across borders remains unnecessarily complex (Figure 8). A voluntary 28th regime for company law and insolvency could be transformative. Firms would register once—and operate across the EU under a single framework. A harmonized insolvency regime would reduce uncertainty and lower financing costs.
Scale requires simplicity.
One Capital Market. Europe has deep savings but fragmented capital allocation (Figure 9). A genuine Capital Markets Union would improve liquidity, enhance risk-sharing, and expand venture capital financing.
Europe does not lack capital. It lacks integration of capital.
One Labor Market. Labor mobility remains too limited. Recognition of qualifications should become automatic wherever possible. Social security portability must be seamless. Administrative burdens to relocation should be minimized.
When workers move to where their skills are most productive, the entire economy benefits.
One Energy Market. Energy fragmentation is now a strategic vulnerability with prices substantially higher than in the past and other economic blocks (Figure 10). Europe must accelerate interconnector investment, harmonize grid access, fast-track renewables and storage permits, and avoid distortionary subsidies.
An integrated energy market lowers costs, reduces volatility, and enhances resilience.
However, EU reforms to support integration are only half of the equation.
A stronger Single Market requires also stronger national reform. Our research shows that roughly half of the estimated 20 percent productivity gains would come from member states implementing reforms at home [4].
Let me highlight three priorities at the national level.
Let me also point out what not to do.
The last months have created a strong sense among policymakers that Europe must better safeguard its strategic economic interests. That instinct is understandable. But under pressure to act quickly, Europe must avoid choices that ultimately weaken competitiveness.
Let me highlight two issues.
Simply relaxing merger rules can backfire if trade and competition barriers across Europe remain in place.
Without a fully open Single Market, larger firms may face less competitive pressure and therefore weaker incentives to innovate. Scale achieved through concentration is not the same as scale achieved through integration.
Instead of weakening competition policy, the EU should focus on removing internal trade barriers and creating genuinely contestable EU-wide markets. Sustainable scale comes from integration and competition—not from protection.
In light of repeated global shocks, the desire to secure access to critical inputs is entirely understandable.
However, uncoordinated national industrial policies are unlikely to deliver the intended results. Untargeted subsidies—while well-intentioned—can divert resources from more productive sectors, raise prices, generate cross-border spillovers, and reduce overall productivity. As highlighted in the IMF’s October 2025 World Economic Outlook, such measures often come with significant efficiency costs. Our recent research also finds that European state aid tends to produce only temporary gains in revenues and employment, while reducing the incomes of competing firms [5].
Instead, safeguarding strategic sectors requires a disciplined cost-benefit approach. Policymakers must clearly define objectives and assess trade-offs.
There could be many different objectives, including strengthening domestic production in strategic sectors, diversifying suppliers, or building strategic reserves of critical inputs. Policy should intervene only where markets are not already adjusting—for example, where firms cannot reasonably diversify or innovate on their own.
Trade-offs must be explicit. Subsidies or domestic-content requirements may reduce supply risks, but they increase fiscal costs and may shift production toward less efficient suppliers. Different instruments carry very different economic and budgetary costs. Their design matters greatly.
A few general principles can guide action:
In the end, resilience does not mean eliminating risk. It means reducing excessive vulnerabilities while keeping economic and fiscal costs manageable.
Let me conclude.
Europe is under pressure—from demographics, geopolitics, and fiscal demands. To safeguard its social model, it must raise productivity and strengthen resilience. The most powerful lever it has is deeper integration.
A fully completed Single Market would raise productivity, crowd in investment, enhance resilience, and reinforce Europe’s global standing.
The economic case is strong.
The evidence is clear.
The question is whether Europe will choose integration over fragmentation, scale over protection, and reform over complacency.
Europe’s future is not predetermined. It will be shaped by policy choices—and by the next generation of economists, policymakers, and entrepreneurs. Many of you will help shape those choices.
Thank you. I look forward to your questions.
[1.] Adilbish, O, D Cerdeiro, R A Duval, G H Hong, L Mazzone, L Rotunno, H Toprak, and M Vaziri,
“Europe’s Productivity Weakness: Firm-Level Roots and Remedies”, IMF Working Paper 25/040.
[2.] IMF Regional Economic Outlook for Europe, How to Better Leverage Europe’s Hubs to Boost Productivity, November 2025.
[3.] IMF, EU barriers to scaling up: The case of fragmented product markets | CEPR, February 2026.
[4.] IMF, Europe’s National-Level Structural Reform Priorities, IMF Working Paper, May 2025.
[5] Luis Brandão-Marques, Hasan H Toprak, A Bitter Aftertaste: How State Aid Affects Recipient Firms and Their Competitors in Europe, IMF Working Paper, December 2024
